RBI Will Have To Raise Rates: Former Governor Raghuram Rajan

With inflation up in India, the nation's central bank will have to raise rates like global peers, Raghuram Rajan, former governor of the Reserve Bank of India, said in a post on LinkedIn on Monday. This, Rajan said, should not be seen as against the interests of the economy.

"At such times, politicians and bureaucrats will have to understand that the rise in policy rates is not some anti-national activity benefiting foreign investors, but is an investment in economic stability, whose greatest beneficiary is the Indian citizen,” Rajan said.

"No one is happy when rates have to be raised," Rajan said, addressing the criticism that higher rates held back the economy during his term. Correct facts are important to guide future policy, Rajan said, adding that "it is essential the RBI does what it needs to, and the broader polity gives it the latitude that it needs to".

Citing an instance of his tenure, he said at the time he took charge, India was in the midst of a full-blown currency crisis with the rupee depreciating sharply. Inflation was at 9.5% then. The RBI raised the repo rate from 7.25% in September 2013 to 8%, before bringing it to 6.5% when inflation consequently fell. This was accompanied with an inflation-targeting framework signed with the government.

These actions not only helped stabilise the economy and the rupee, they also enhanced growth, he said. "It was not a flash in the pan, suggesting we were laying the foundations for stability," he said.

The RBI has maintained low inflation and low interest rates during turbulent times such as demonetisation and the pandemic, he said. With a rise in reserves to over $600 billion today, the RBI has calmed financial markets despite the rise in oil prices. This is unlike the crisis in 1990-91, which was also precipitated by higher oil prices, he said. The RBI's sound management has ensured it didn't happen this time, he said.